Wu Jiajun, director of the Wealth Management Department of Citibank, said in an interview with the First Financial reporter that the pound is currently facing three tests - the new crown pneumonia epidemic, Brexit , how will the economy continue to recover in the future.
For the subsequent trend of the pound, analysts generally believe that the pound may face a new wave of short selling in the short term. In the medium term, as the uncertainty brought about by negative news retreats, it may strengthen again, and the recent pullback may provide layout opportunities.
may hit its worst monthly performance in four years
Since this week, the pound has continued to fall against the US dollar, falling to a 9-week low. Since September, the pound has fallen by 5%, or the worst monthly performance since 2016.
The sudden and rapid deterioration of the epidemic in the UK is undoubtedly the biggest driving force behind the continuous decline of the pound in recent days. According to statistics from Johns Hopkins University, as of the evening of the 24th, the cumulative number of confirmed cases in the UK has exceeded 410,000. Yesterday, the UK added 6,634 new confirmed cases of COVID-19, the largest single-day increase since the outbreak of the epidemic.
As the second epidemic hit, British Prime Minister Johnson had to announce that he would take stricter restrictions, ordered restaurants and bars to make early proofing, encourage people to work from home, and said the new restrictions could last for six months. Chris Whity, the chief medical officer of the UK, known as the "Doctor of Doomsday", warned on the 21st that the UK is at a "critical moment of the epidemic" but is moving in the "wrong direction".
The second blockade is undoubtedly another huge impact on the unrecovered British economy. During the first round of epidemic, the UK experienced the pain of a sudden economic downturn. In the second quarter, the UK's GDP (GDP) plummeted by 20.4% month-on-month, making it the worst performer among the G7 countries and set the largest GDP decline since record in 1955. JPMorgan predicts that if the UK hotel and catering industry is closed for two weeks, the country's GDP may lose at least 2%.
According to data released on Tuesday, the scale of salary subsidies provided by the UK government has exceeded 50 billion pounds (about 64 billion US dollars), highlighting the impact of the epidemic on the economy. During the European session on Wednesday (September 23), the UK released the initial value of Markit service industry PMI and the initial value of manufacturing industry PMI data for September also performed well.
"When the epidemic began, the British government responded slowly. The epidemic severely hit the UK's service industry, which accounted for 82% of the UK economy. Therefore, the sharp decline in the UK economy is expected. After the UK introduced stimulus policies and the Bank of England relaxed its monetary policy, the market began to rebound from the bottom. Taking into account the impact of the epidemic and the government's relatively lagging fiscal and monetary stimulus measures, the UK's GDP is expected to decline by 6% this year," said Wu Jiajun.
In addition, Brexit remains stalemate, which has also dragged down the recent trend of the pound. EU Brexit chief negotiator Michel Barnier will arrive in London before formal talks on September 28, and Brexit negotiations need to push for a reduction in debate on internal market bills to break the negotiation deadlock. Although Sky News reported that negotiations between the EU and the UK were progressing slightly better than expected, any adverse news would put more pressure on the pound.
"The main contradiction between the UK and the EU is that the UK is seeking to be regarded as a sovereign state while gaining access to EU markets. Two weeks ago, the UK further intensified tensions and proposed an internal market bill, declaring that if there is no trade agreement, they could overturn two of the Brexit agreement related to the Northern Ireland Protocol. The EU insists on customs inspections on goods entering Northern Ireland from the mainland to ensure that the corresponding tariffs are paid before goods enter a single market through Republic of Ireland ." Wu Jiajun said, "The UK hopes to reach an outline trade agreement at the EU Council meeting in mid-October. This trade agreement requires approval from the UK and all 27 EU member states by the end of this year. Therefore, the weeks after the EU Council meeting will become a very critical period."
Forex strategist Philip Wee, DBS Markets, also said that the UK's chief scientific adviser warned that in mid-October, the number of epidemic infections in the UK may increase exponentially from the current 4,000 per day to 50,000. Given the current situation, the prospect of a no-deal Brexit in the UK is unpopular.
opens the downward channel or should it be lagged on a dip?
Forex strategist for UOB Singapore, Peter Chia, believes that the pound is expected to weaken further in the next few weeks. "Although our view that the pound will fall is confirmed, we underestimate the downward momentum of the pound and do not rule out further weakness. But he said, "Because the pound has been oversold recently, it may be difficult to reach the next support level of 1.2650, with 1.2680 being a relatively strong support level, while the upward resistance level is 1.2780. "
As of today's morning, the pound was 1.2754 against the US dollar. Sheriff Peter believes that he can short it below 1.2755, and buy it after breaking 1.2710.
Easy Markets also continues to bearish on the pound. Its research report said that from the fundamentals, the negative news of the pound is real. The UK announced social restrictions and the prospect of Brexit deteriorated. No matter which news is an important reason for the market to short the pound.
"The pound news is too negative, and the pound may usher in a new round of correction in the future. Technically speaking, the key pressure level of the pound is around 1.2775, the support level is around 1.27, and it is not easy to guess the bottom if it breaks. "He said.
Mitsubishi Japanese Union also believes that there is a downward risk in the pound, but the government's further support policy will provide temporary support. Mitsubishi UF Research Department said on Tuesday that there was a strong expectation that the UK would implement a comprehensive lockdown similar to that in March to May, but in fact, the UK has not implemented a complete lockdown for two weeks, and the market may show signs of relief. In addition, the pound will be subject to further needles announced by the British Finance Ministry following the lockdown policy. Support for individual and corporate employment and wage subsidy schemes.
Wu Jiajun is optimistic about the medium-term trend of the pound. Regarding one of the negative factors of the pound, Brexit, he judged that given the severe impact of the epidemic on the EU and the UK economy, both sides are more urgent than the desire to reach an agreement in the early stages of negotiations, and the possibility of reaching an agreement in the future is still higher.
In addition, he said: "The recent rise of the pound against the US dollar has been dominated by the decline of the US dollar, while the pound trade-weighted valuation remains low. The market demand for UK real estate and stocks has been gradually released, and the issuance of UK Treasury bonds has also shown good demand. Therefore, as the economy gradually recovers and the impact of the epidemic is under control, the path to Brexit is clearer. By the end of the year, the major uncertainties facing the UK may gradually decrease, and the market may usher in a rebound. Therefore, the pound pullback may create layout opportunities. ”
